Tracker funds' hidden risk

Article Abstract:

There are risks involved in investing in funds following stock market indices, as is shown by the impact of price falls for technology stocks on the FTSE 100 index in early Jan 2000. Investors are not able to control the extent to which they have exposure to specific sectors or stocks. The indices have changed dramatically as a result of a boom in technology stocks, and risks emerge when there is volatility in the market. Telecoms, oil and gas, pharmaceuticals and banks have great weight in the FTSE 100.

United Kingdom, Stock price indexes

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Trackers will end in tears

Article Abstract:

Index tracking funds (trackers) cost less for investors since investment managers are not needed to take decisions on how to invest. There is concern that tracker funds have become so popular that they can distort markets. Some stocks may be difficult to purchase since they are popular among tracker funds. Tracker funds may have pushed up the stock prices of large companies and market leaders, simply because these companies are large and leaders. Tracker funds could encounter serious problems which could affect stock markets as a whole.

Securities and Commodity Exchanges, Security and commodity exchanges, Securities Exchanges, Stock-exchange, Stock exchanges, Exchanges

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Tracking an inefficient portfolio

Article Abstract:

Tracker funds may be inefficient investments, although they can perform as well as actively managed funds. The FTSE 100 is an inefficient portfolio, and active fund managers can perform better without incurring more risks than a fund following this index. Financial stocks would have a lower rating in an inefficient portfolio since they increase risk levels and their returns are not high enough to compensate for this. An efficient portfolio would also have large holdings in GEC, BG and BAT due to the covariances between these stocks and others with higher yields are low.

Analysis

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